Today, Nvidia overtook Alphabet in terms of market capitalization, making it the third biggest U.S. company behind Microsoft and Apple. There has been a lot of talk recently about the stratospheric rise of Nvidia’s sales and stock price. Also, how the company has a lot of room to grow given they are the most important provider of AI hardware. Financial analysts’ most optimistic takes see another 30%+ increase for the Nvidia stock price. At times, the euphoria reaches @Tesla or #crypto levels of get-rich-quick excitement.
But Nvidia is hardly without challenges:
Success breeds competition. While Nvidia dominates the high-end GPU market, competitors like @AMD and @Intel are making strides, especially in the integrated GPU (iGPU) market. Once they focus more on AI hardware, and specifically on its performance, they will begin to eat into Nvidia’s market share.
Lacking diversification. While AMD and Intel’s weakness is a lack of focus on AI, Nvidia’s risk is the opposite – too much focus on AI. When three quarters of a company’s revenue come from one segment (namely, “Datacenter” or AI hardware), one starts to wonder just how prone to disruption of that segment the company is.
What happens if the AI fever breaks? Currently, we are in the goldrush phase of AI where everybody wants a spade. Demand for H100 and H200 GPUs is off the charts. But where there are now hundreds of companies competing and buying Nvidia, soon a shakeout will follow mainly favoring a few digital giants such as @Google, @Facebook and @Microsoft, and reducing the number of buyers and possibly reducing demand. Also, once realization sets in as to what AI can do and what it cannot, we may enter the infamous “through of disillusionment”, which may further reduce demand.
Outsourced chip production. Nvidia uses chips for its products that are supplied by third parties, exposing the company to potental supply chain delays. That introduces a lag when it needs to react to increasing demand quickly.
The Chinese market may be closed even more for U.S. companies. The Biden administration has already banned the export of the most advanced AI hardware, affecting Nvidia’s sales in China. Nvidia said the ban exposed it to a potential sales decline of about $400M per quarter or a moderate 5% of total sales. Historically, the People’s Republic stood for 25% of sales on average, so one fifth of that would be at stake. Nvidia stated that so far, by developing slower chips for China, they had averted a greater sales decline. Even so, the share of the Chinese market has declined in recent quarters by about 5 points. It is unclear if that stemmed from AI chip export restrictions or a decline in Gaming. What’s more, the Biden administration has made noises it might tighten export controls even more.
All in all, in the short- to mid-term, Nvidia will continue to fly high. But mid- to long-term, it may well come back down to earth.
Leave a Reply